Maybe Bernanke and Gross are right. Maybe not. But why take the risk? Let’s assume the worst and figure out a way to boost growth by at least one percentage point and get back to the post-WWII average of 3.4%.

A progressive consumption tax could boost GDP by around 6% in the long run. As AEI’s Alan Vaird explains, consumption taxes promote economic growth because they avoid a central flaw of income taxes: Their penalty on saving and investment. An example:

Consider two individuals, Patient and Impatient, each of whom earns $100 in wages today. Impatient wishes to consume only today and Patient wishes to consume only “tomorrow,” which is many years in the future. Saving yields a 100 per cent rate of return between today and tomorrow. With no taxes, Impatient consumes $100 today. Patient saves the $100, earns $100 interest, and consumes $200 in the future.

What happens with a 20 per cent income tax? Impatient pays $20 tax on his wages today and consumes the remaining $80, which is 20 per cent less than in the no-tax world.

Patient also pays $20 tax and saves the remaining $80, earning $80 interest. However, $16 tax is also imposed on the $80 interest. That leaves Patient with $144, which is 28 per cent less than in the no-tax world, compared to a mere 20 per cent reduction for Impatient.

The income tax imposes a higher percentage tax burden on Patient solely because she consumes later….

One way we deal with the anti-savings bias of the income tax is by the reduced tax rate on dividends and capital gains. It’s not as efficient as with a consumption tax, but better than nothing. Since switching to a progressive consumption tax is not on the near horizon, we should avoid raising the tax rates on dividends and capital gains as President Obama wishes to do.

At the very least, we should leave investment tax rates where they are. Even better, we should take a small step toward a consumption tax by reducing these rates the longer an investment is held. Clayton Christensen, a business professor at Harvard University, recommends a zero rate after five years.